Can We Make money On Equity ?
We are seeing lot of investors making money in equity markets. At the same time, there are lots of investors losing money also. Those who are losing generally will not invest again and keep quiet. In the same market, some makes money and some loses money. Let us analyse the basis requirements for an investor to make money in the equity market.
Everybody knows that equity markets are for long term investments. But how to define long term? For some, even 1 week is long term! This is the issue. If you want any meaningful returns from equity market with minimal risk, you should think of 7 years and above. Anything less than this is short term for a retail investor. Equity markets will have lot of volatility. But if you are a long term investor, you need not worry about the daily market movements. Everybody was thinking like the world is ending in 2008! I remember, my mutual fund portfolio was reduced to almost 60% at that time. I never had any pain during that phase, because I never want to sell at that time. For me the loss was only notional. But everybody knows what happened later. Market bounced back and everybody started smiling again. We should have the patience to stay invested for a reasonably long time to reap benefits from the equity markets. Also we should develop a mind set of not bothering much about the price movement in between.
If you analyse the Sensex values from inception we can see that the market was never in continues bearish mode for long time. The period from 2000 to 2003 was the lengthy bearish phase in history. So, if you have patience, you need not sell in panic, but can really make money in the equity market in the long term.
Don’t buy on Tips and recommendations
Markets are flooded with the so called investment experts now, who can even predict daily price movements! Please apply the common sense and logic. If they can predict it correctly, every time why they should work as advisors, they can rather invest some money and multiply it manifold!
Invest in a company’s shares only if you can understand the company fundamentals, quality of the management, sector in which it operates, growth prospect of the sector, global trends etc. Going by somebody’s advice should not be the only criteria to invest. You can listen to all, but ultimate decision should be based on the above facts.
If you follow this, you may miss to invest in one Infosys at 10/- and made huge money but at the same time, you should have avoided many Silver Line Technologies and huge losses. Instead you should have invested in some companies with reasonable growth rate and made decent money in the long term.
3. Don’t be greedy
My friend Rahul was an active investor and he made handsome gains during the period 2004 – 08 from equity market. He became so greedy after tasting this profit and he started margin trading, entered futures and options in a big way just before the market crash in 2008. Once the market started crashing, he arranged loan and invested further to recover the loss. The market continued to fall almost 50% from the peak level. He lost everything including his home to repay the creditors! Now I heard that he is in the business of giving stock market tips to investors!
Last week, one of my customers asked me about the chances of listing gains in a particular IPO. I told him to avoid such IPOs because of the current market conditions and more compliance issue regarding the company. But he wanted to test his luck with 1 Lakh and that 1 Lakh has become 40,000/- on the listing day itself!
We must limit our expectations. We cannot be greedy like this. If you can happy with around 12-15% returns, equity market is the place for you. Otherwise you can try your luck with pyramid schemes, ponzi schemes and be a hero for a day and zero in the next day!
4. Book profits periodically
It will be a better idea to book profits periodically. Markets are depending on several economical factors and the bull and bear phases will come in cycles. We cannot time the markets, but we can book profits partially periodically. Those who have booked partial profits in early 2008 got an excellent chance to enter the market again at 50% rates. It may not possible to get chances like that always, but once we reach a particular price target, it make sense to book profit in a systematic way.
We have to consider many economic trends before taking the decision for this. But if your investment has appreciated much more than anticipated, you should book partial profit, after analyzing the tax implication. In the case of mutual fund investments, rebalancing will take care of this profit booking.
5. Don’t have Ego
We cannot afford to have ego in investing. If you have made some wrong purchase and realize it later, you should be ready to book loss and move on to the right shares. Having emotional attachment to any particular company and it’s shares will not help you. The fear of losing a small amount will take you to bigger loss, if you delay your selling decision. Leave your ego at home, while going to the equity market. Market is influenced by many factors both internal and external. Even a seasoned investor will make mistakes, but his smartness lies in cutting losses at the right time.